If your kids have completed college or you’ve paid off your mortgage, you might be wondering if now’s the time to cash out your whole life insurance. Taking the cash value from your whole life insurance is a big decision and can have a lasting impact on your financial future. We’ll help you weigh the benefits and drawbacks of cashing out your whole life insurance policy.
Face Value Versus Cash Value
Making this decision starts with understanding how whole life insurance works. A whole life insurance policy has two components. The first is the face value, or the amount that will be paid to your beneficiaries when you die. The second is the cash value, which is a savings account that’s funded by a portion of your premiums. When you cash out a whole life insurance policy, you are not getting back your full premium contributions; you will receive the full cash value of the policy.
How to Access Cash from Your Whole Life Insurance Policy
Whole life insurance provides guaranteed protection for the entirety of your life. As a policyholder, you’ll pay consistent premiums and have guaranteed cash value accumulation, making it ideal for people with long-term goals. When it’s time to access the cash you’ve accumulated, there are a few different options:
Surrender Your Policy
If you’ve had your policy in force for a few years and it has accumulated some cash value, you can cancel the policy and take the surrender value in a cash payment. By surrendering your policy, you are giving up the insurance policy and, in return, you’ll receive the cash value less any fees. When you cancel your policy, your heirs will receive nothing from the policy when you die. Although surrendering your policy might get you the cash you need, it should be a last resort unless you have adequate life insurance coverage in place elsewhere.
If you still need your life insurance policy, you have other options to withdraw cash and keep your life insurance policy in place: withdrawals, loans and premium payments are all options you should consider.
Generally, you can withdraw a limited amount of cash from your whole life insurance policy. In fact, a whole life insurance cash-value withdrawal up to your policy basis, which is the amount of premiums you’ve paid into the policy, is typically non-taxable. Any withdrawals that exceed your basis, meaning you’re dipping into gains, will be taxed at your ordinary income rate. Your death benefit will be reduced based on the amount you withdraw. Keep in mind, though, that cashing out your life insurance policy may leave you vulnerable to life’s uncertainties.
Take a Loan
Most cash-value policies allow you to borrow against your policy with a loan. However, you won’t be borrowing against your policy. Instead, you’ll be borrowing money from the issuer and using your policy as collateral. Depending on the terms of your policy, the loan might be subject to interest. Unless you pay the interest out of pocket, it will be added to your loan balance. If you don’t repay the loan or only pay a portion of it back, the balance of your outstanding loan would be deducted from your death benefit. There will also be a maximum loan amount you can receive from your policy; talk with your local Farm Bureau agent to find out the maximum loan amount you can receive.
Cover Your Premium Payment
If you end up short on cash and are having a difficult time continuing to pay your whole life insurance premium, you may be able to stop paying the premium out of pocket and instead use the cash value of your policy to cover the premium.
If you decide to cash out your whole life insurance policy, don’t risk going without coverage. Farm Bureau offers a range of life insurance products to meet your needs, including term life insurance. Talk to your Farm Bureau agent to create a plan that’s right for you.